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Indian economy: Renewed optimism?
Fri, 6 Jan Pre-Open

It has been a gloomy year for the Indian economy. Both the benchmark stock index and the rupee took a severe beating, putting India among the worst performing markets in Asia. Economic growth is hovering around 7%, the lowest in two years. There seemed to be no end to the steady flow of bad news for the Indian economy with persistent inflation, rising interest rates, dipping industrial output, widening current account deficit, the worsening fiscal imbalance, declining business confidence and investment slowdown.

But amid the chorus of gloom, Indian chief economic adviser Kaushik Basu believes things are about to change for the better. Inflation which has been stubbornly high over the past year is showing signs of coming down. Food inflation has already come down and even turned negative. The central bank's monetary tightening cycle has reached its peak and interest rates are set to go down. That could help breathe some life into the sluggish economy, by reviving investment. On the global front, the US economy is now on a slow rise while Europe remains weak but it could avoid a recession.

The main worry of policy paralysis and high fiscal deficit still remains. The government is certain to miss its FY12 fiscal deficit target of 4.6% of GDP due to sluggish tax receipts and high expenditure on subsidies. Given the corruption scandals last year, the government is scared of taking hard decision and excessive risk aversion still persists. The suspension of foreign direct investment (FDI) in multi brand retail has also dented investor confidence. A slowdown in exports has also blown the country's current account deficit beyond the government's perceived comfort level of 3% of GDP. According to a report prepared by Citi, India's current account deficit could widen to 3.5% of GDP in FY12. But Mr Basu believes that growth in manufacturing exports will reduce the deficit from next fiscal and see no reason to worry about the overall balance of payments situation. Thus, with the worst behind us, Indian economy may be heading in the right direction.

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